Lender discretion and policy exceptions in the underwriting process can increase fair lending risk within your commercial lending space. Fair lending is not just a consumer loan concern. What you need to understand is that lender discretion and/or their ability to make exceptions are not wrong but you need to have controls in place to monitor when it occurs so you can mitigate the associated risk.
Jerod explains more in the video.
I mentioned a little bit earlier about discretions and exceptions. That's where the risk will reside when it comes to fair lending with commercial lenders, in my opinion, when you don't follow the policy and procedures.
And so page number eight, letter C1 talks about this what and why and what I want to break it down or how I want to break it down in this way. It's okay to make exceptions when you make an exception, but understand there are some rules you are not allowed to break. Some rules are allowed to be broken. You need to make sure you understand which is which. When you're allowed to break a rule once in a while, okay, that's what we're going to call an exception. You have rules that you follow most of the time; this rule, in this particular instance, we're not going to follow it. Exception.
Now discretion is a little bit different. Okay, we have rules, but for this particular thing, we don't really have a rule. We give the lender a broad range of discretion, or maybe the rule is there's a broad range. Discretion is just a slightly different form. Both of those create fair lending risks.
Now, I don't want anybody to take away from our program today and go back to your management team and go, I just listened to Banker's Compliance Consulting and Jarod, and they said we couldn't do discretion anymore. And that's not what I'm trying to say. When it comes to discretion, we need to have controls in place, though. The reason discretion is important is because of this. That's what community banks do. Okay, when people come to you, they're not always an 800 plus Beacon score with low loan values and debt-to-income ratios.
Hey, sometimes you have people just starting out—new startup businesses along the way. Sometimes you have people that have been customers, and you have relationships, and they fall down. They get impacted by life or get hit by a pandemic. And you're there to help them back up again. Not everybody fits inside your pricing box and your underwriting worksheets, but somehow you help them out, and you get them back to hopefully where they fit inside those boxes someday again or eventually down the road.
So how do we do that? Well, it requires us to make some exceptions along the way. It allows us to; it requires us to use some discretion. So it's not wrong to have exceptions and discretion. It has to be managed, though. And I'll give you what your management teams are up against here in just a little bit.
Published
2023/02/02